"Understanding Tax Cuts"
David R. Kamerschen, Ph.D
Professor of Economics
University of Georgia
Sometimes politicians, journalists and the liberal left exclaim;
"It's just a tax cut for the rich!" and it is just
accepted to be fact.
But what does that really mean?
Just in case you are not completely clear on this issue, I hope the
following will help. Please read it carefully.
Let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for dinner and the bill for
all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men ate dinner in the restaurant every day and seemed quite
happy with the arrangement, until one day, the owner threw them a curve.
"Since you are all such good customers," he said, "I'm
going to reduce the cost of your daily meal by $20." Dinner for
the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so
the first four men were unaffected. They would still eat for free.
But what about the other six men - the paying customers? How could
they divide the $20 windfall so that everyone would get his 'fair
share?'
They realized that $20 divided by six is $3.33. But if they
subtracted that from everybody's share, then the fifth man and the
sixth man would each end up being paid to eat their meal.
So, the restaurant owner suggested that it would be fair to reduce
each man's bill by roughly the same amount, and! he proceeded to
work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now paid $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four
continued to eat for free. But once outside the restaurant, the men
began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man.
He pointed to the tenth man," but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only
saved a dollar, too. It's unfair that he got ten times more than me!"
"That's true!!" shouted the seventh man. "Why should he
get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison.
"We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for dinner, so the nine
sat down and ate without him. But when it came time to pay the bill,
they discovered something important. They didn't have enough money
between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how
our tax system works. The people who pay the highest taxes get the
most benefit from a tax reduction. Tax them too much, attack them
for being wealthy, and they just may not show up anymore.
In fact, they might start eating overseas where
the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D
Professor of Economics
University of Georgia |